Answer Happy

QUESTION You we do to meet with potential new client in York, who will shortly turn 30 years old. She has recently opened a loveted personal pension (SIPP) is intending contribute 10.000 per mum to it in nominal terms and starting on her 30" birthday) and wees to receive an pension of $20,000 (in real term) from it when she retires You have certained that she pays income tax at the higher inte of 10%, the initiation is expected to be 1.6% per annum and the current annuity rules are: Rentage Annotate 05 4.2% 30 4.0% 55 3.896 You have already decided that you will advise Me Yorkde to invest her SIPP portfolio in a FTSE All-Shure equity index tracker fund and one of the gilts shown in the table below. Gilt Maturity Date Market price per 100 nominal €144.00 4% Treasury 2047 10% Treasury 2052 3% Treasury 2007 14 July 2017 14 April 2052 101.40 14 February 2067 £120.70 Each gilt pays interest on a semi-annual basis is redeemable at its nominal value of £100 and it is your intention to advise Mrs Yorkie to undertake cosh matching The equity index trackerſund has a tracking error of 0.50% and long run historio total nominal return from UK equities is 6.1% You are also of the opinion that low risk investors should not hold more than 50% of their portfolios in equity but that this can be increased to 75% for medium risk investors Required Calculate the expected return of the equity index troker fund and explain what is meant by tracking error to Mrs Yorbe continues

Gilt Maturity Date Market price per £100 nominal 4% Treasury 2047 14th July 2047 £144.90 1.6% Treasury 2052 14th April 2052 £91.40 3% Treasury 2057 14th February 2057 £120.70 Each gilt pays interest on a semi-annual basis, is redeemable at its nominal value of £100 and it is your intention to advise Mrs Yorkie to undertake cash matching. The equity index tracker fund has a tracking error of 0.56% and long run historic total nominal return from UK equities is 8.1% You are also of the opinion that low risk investors should not hold more than 50% of their portfolios in equity but that this can be increased to 75% for medium risk investors. Required: a) Calculate the expected return of the equity index tracker fund and explain what is meant by tracking error to Mrs Yorkie (8 marks) continues overleaf